You must report a transfer pricing position in Category A on the reportable tax position (RTP) schedule where it stems from related party dealings not covered by section 284-255 (Taxation Administration Act 1953) compliant transfer pricing documentation. This is because there's insufficient information to determine if it's more likely to be correct than incorrect.
You need to report revenue and expenditure based transfer pricing positions (not covered by compliant documentation) separately. But you can combine and report all related party revenue or related party expenditure as single Category A RTPs.
Where a transfer pricing position is also a Category C position you don't need to disclose this position in Category A or B.
If your related party dealings are covered by section 284-255 compliant transfer pricing documentation, your transfer pricing position is only a Category A or B RTP if either:
- it falls within the high risk zone of published ATO guidance that is not a Category C position
- the actual amount you receive or pay falls outside the arm's length range between the 25th quartile and 75th quartile in your documentation and the difference results in a transfer pricing benefit.
The benchmarks used in preparing your section 284-255 compliant documentation need to be appropriate to your circumstances. Your documentation must include assurance, from an appropriately experienced professional, that the position taken is reasonably arguable.
Calculating materiality for transfer pricing positions
You only have to disclose RTPs where the tax (or notional tax) affected by the position exceeds your materiality amount. The methods for working out the tax / notional tax affected by an RTP are described below.
Related party dealings covered by section 284-255 compliant transfer pricing documentation
Materiality calculation is based on the difference in the tax you would have paid if your transfer price was based on the median of the arm’s length range and the tax you actually paid. This is because Commissioner initiated transfer pricing assessments generally move a taxpayer's transfer pricing position to the median of the arm’s length range.
Related party dealings not covered by section 284-255 compliant transfer pricing documentation
You can base your materiality calculation on either:
- applying the relevant accounting standards to quantify the uncertainty
- calculating the difference in the tax you would have paid if you used a transfer price based on the arm’s length price and the tax you actually paid.
Applying accounting standards to determine uncertainty
AASB 112 Income Taxes specifies requirements for current and deferred tax assets and liabilities. An entity applies the requirements in AASB 112 based on applicable tax laws. AASB Interpretation 23 Uncertainty over Income Tax Treatments clarifies how to apply the recognition and measurement requirements in AASB 112 when there is uncertainty over income tax treatments.
Where you have used the recognition and measurement methods specified in AASB Interpretation 23 to calculate the value of tax uncertainty for a tax position, your position is material where that value exceeds your materiality threshold.
In these instances the position is also a Category B RTP.
Arm’s length calculations
If you haven't conducted a transfer pricing comparability study, you can base your materiality calculation on either:
- the benchmarks listed in Practical Compliance Guide PCG 2017/2 Simplified Transfer Pricing Record Keeping Options, as described below (note: you can apply the benchmarks in your materiality calculation only if you meet the relevant qualifying requirements in PCG 2017/2 for the safe harbour benchmark you are applying)
- a conservative approach, where a transaction type is not covered by PCG 2017/2
Related party revenue and expenditure are separate positions so you must not net them off in calculating materiality. You can also have multiple transfer pricing positions covering different income or expense items.
Materiality for outbound transfer pricing positions
Conservative approach
Materiality calculation is based on the gross value of outbound supplies you are making multiplied by the tax rate.
Benchmarks
The following are the established benchmarks and calculations for determining amounts to use in your materiality calculation, where you:
- made a loan to a related entity, the amount of interest you would have returned if you charged the rate for the year as specified in PCG 2017/2 (4.37% in 2016, 4.34% in 2017 and 3.79 in 2018) less the amount of interest you actually returned
- are providing services to a related entity, the amount of income you would have returned from providing
- management and administration services had your mark-up been 5% less the amount of income you actually returned
- technical services had your mark-up been 10% less the amount of income you actually returned
- other intra-group services had your mark-up been 7.5% less the amount of income you actually returned for providing intra-group services.
Materiality for inbound transfer pricing positions
Conservative approach
Your materiality calculation is based on your total deduction for inbound supplies multiplied by the tax rate.
Benchmarks
The following are the established benchmarks and calculations for determining amounts to use in your materiality calculation, where you:
- are an Australian distributer of a product from a related party, the amount you actually deducted to acquire the products less the amount you would have deducted for acquiring the products in order to achieve a net margin of 3%
- are deducting interest on a loan from a related party, the amount of interest you actually deducted less the amount of interest you would deduct if the interest rate charged was set at the Reserve Bank of Australia indicator lending rate for ‘small business, variable, residential secured term'
- are receiving services from a related party, the amount you deducted for
- management and administration services you received less the amount you would have deducted had the supplier’s mark-up been 5%
- for technical services you received less the amount you would have deducted had the supplier’s mark-up been 10%
- any other intra-group services you received less the amount you would have deducted had the supplier’s mark-up been 7.5%.
Applying the benchmarks for transfer pricing positions
You can only apply the benchmarks in your materiality calculation if you meet the relevant qualifying requirements in PCG 2017/2 for the safe harbour benchmark you are applying.
For example if you are a distributor, you have to satisfy all conditions that apply to distributors in PCG 2017/2 (except for the profit-before-tax ratio benchmark) to apply the benchmark in your materiality calculations. For you to satisfy the conditions that a distributor would have to satisfy, you must:
- have a turnover below $50 million
- have not made sustained losses
- not have related-party dealings with entities in specified countries
- not have undergone a restructure within the year
- not have related-party dealings involving royalties, licence fees or research and development arrangements, and
- have assessed your compliance with the transfer pricing rules.
Where you haven't met these conditions you have to apply the conservative approach.